Landlords of commercial premises are experiencing unique situations which have never arisen before as a result of the COVID crisis and the requirement of hospitality venues to restrict their trading.
This article seeks to address some of the situations and to explore options that might be available in a landlord in such situation.
In one case that we have been instructed on, the tenant of pizza premises in Central London had a successful business model operating until 2:00am every evening.The premises are currently restricted to 10:00pm which means that their business model is unviable.The premises have been closed and all business ceased since March 2020.The June and September quarters rent has not been paid.
The tenant has indicated that a liquidation is likely but as yet no formal steps have been taken to commence insolvency or administration and the landlord is therefore left in the position that it is receiving no rent, its commercial premises have been empty for 6 months, yet it cannot repossess the premises due to the moratorium on forfeiture introduced by Section 82 of the Coronavirus Act 2020 as extended.
To make matters worse, the tenant has removed all moveable items from the premises thus demonstrating that it has no realistic intention of ever trading from the premises again.To all intents and purposes, the premises have been abandoned.
Rather than see the premises continue to be empty, the landlord would wish to recover possession of the premises with a view to trading from them itself, or alternatively to enter in to a new lease with a fresh tenant.
All the rent arrears have accrued since March 2020, therefore commercial rent recovery is also not an option, and, in any event, there are no possessions left in the property on which distress could be levied.
What other options does the landlord have?
Surrender of the premises
Can the tenant be persuaded to agree a surrender of the premises to determine the lease? Surrender is a consensual arrangement between a landlord and a tenant which results in the vesting of a tenant’s estate in the landlord and determination of the lease term (Fairweather v St Marylebone Property Company 1962).
There are two methods of surrendering a lease:
An express surrender by deed is ideal, and a landlord in the position outlined above can certainly ask the tenant whether in the circumstance it will surrender its interest. Surrender would determine the lease and stop the tenant’s rent liability continuing and enable the landlord to deal with the premises as it wishes.
If a tenant is simply not responding to the landlord or refuses to surrender, then could a surrender be inferred by operation of law?
This is potentially very useful to the “abandonment” scenario set out above.There must be conduct which shows a handing back of the property by the tenant and an acceptance of this by the landlord.Merely vacating the premise will not suffice.
Any conduct consistent with the lease ending will amount in a surrender by operation of law such as:
Circumstances where a surrender by operation of law has not been inferred include:
Effect of Surrender
If a surrender of premises takes place, then the legal estate vests in the landlord and the landlord can recover possession. The tenant is released from future rent liability.
Other Breaches of Covenant
In the scenario above, if a tenant will not agree express surrender and will not hand the keys back to the landlord, the tenant may still be in breach of other lease covenants.
For example, a closed down restaurant which has not traded for 6 months may put the tenant in breach of covenant on any of the following grounds (assuming that these are properly set out in the lease)
As we know, premises deteriorate once they are no longer occupied. Without heating and light and air circulation, significant issues can arise with damp, mould, vermin.
Most leases will have a clause whereby the landlord can require access to the premises for the purposes of inspection. We recommend landlords keep regularly monitoring and inspecting the premises by the exercise of this right. Any concerns over the state of the premises after inspection should be documented and notified to the tenant.
Such actions by the landlord may lead to negotiations whereby the tenant agrees to surrender the premises back to the landlord.Such documentation will also be critical if the landlord does take action to obtain forfeiture of the premises for breach of repairing and/or other covenants.
Forfeiture of Commercial Premises for Breach of Covenants other than Payment of Rent (and other monies due as rent)
A landlord can still bring forfeiture proceedings to forfeit premises for breach of covenants other than the payment of rent.The Coronavirus Act 2020 Section 82 imposes a moratorium only on forfeiture for rent and monies due as rent. However, it is likely the Courts will regard with suspicion any attempt to circumvent the Coronavirus Act 2020 and therefore a landlord will need good evidence of breach of covenant.
Up until now, clients have generally been advised that forfeiture actions need to be put on hold until the moratorium is lifted. However, we have no indication as to when it might be finally lifted. Initially, the moratorium was to 30 June 2020 and it has been extended to 31 December 2020. The prospects of it being extended further at the end of the year, perhaps until March 2020 must be considered likely.Accordingly, landlords need to consider alternatives. A landlord’s primary motivation is to maintain the freehold reversion value of its interest. The non-occupation of premise for a lengthy period of time is likely to impact on the freehold reversion and if there are specific covenants which have been breached relating to the use and repair of the premises, this may form the best way forward for a landlord to protect its interests.
We have not considered the consequences of a tenant going into administration or insolvency but it is relevant to note that a insolvency practitioner can disclaim a lease if the lease would impose financial obligations on the liquidator which the liquidator cannot meet. Generally, a liquidator will not wish to become personally liable for rent payments under a lease and can be expected to disclaim a lease. It is likely there are many restaurant premises which are not trading, and where there are substantial rent arrears, and where no formal liquidation or administration has yet been commenced. These scenarios are incredibly frustrating for landlords. It is hoped that this article will have highlighted some of the practical measures a landlord may wish to take in this scenario.
Pinney Talfourd are experts in Commerial Property Litigation and can advise you on changes to the law so you are given up to date advice.
Please do not hesitate to contact us should you wish to discuss anything further.
This article was written by Stephen Eccles, Partner in the Property Litigation at Pinney Talfourd LLP Solicitors. The contents of this article are for the purposes of general awareness only. They do not purport to constitute legal or professional advice. Specific legal advice should be taken on each individual matter. This article is based on the law as of October 2020.